Price and Payout
Posted: 19 Aug 2019 Last revised: 11 Dec 2023
Date Written: August 14, 2019
Abstract
I find that firms reduce payouts (both repurchases and dividends) when investors can learn from secondary bond market price signals following the implementation of the TRACE platform. The evidence suggests that information in bond prices diminishes the usefulness of corporate payout as a signaling device and/or a means to mitigate agency conflict. Consistent with this interpretation, cross-sectional analyses reveal that the effect is stronger for firms with more opaque information environments in the equity market, when bond price signals are more informative, and when investors have greater uncertainty about firms’ credit risk. The effect is weaker for firms audited by Big N auditors and firms that issue more management forecasts. Further, stock market reactions to repurchases and dividend change announcements decrease significantly when bond prices become observable to investors via TRACE, consistent with information in bond prices reducing the informativeness of payout changes. Collectively, the findings provide novel evidence on the role of market signals in shaping corporate payout policy.
Keywords: Dissemination, Market Transparency, TRACE, Financial Market Frictions, Slack, payout, dividend, repurchase
JEL Classification: G34, G32, G35, G38
Suggested Citation: Suggested Citation